Morgage Points Explained - What are they - Should you pay points or no points...
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CAN PAYING POINTS BE GOOD? Paying points can allow you to 'buy' a lower interest rate that would otherwise not be obtainable. This is possible because most banks---just like brokers---will eventually package your morgage and sell it to investors in what is referred to as the 'secondary market'. Most homeowners have experienced this at some point: opening a piece of mail notifying you that a new bank now holds your morgage. The higher your rate is the more money a bank can sell your loan for (to an investor). The lower the rate then, of course, the less money the bank will receive when selling your loan to that same investor. To offset the decreased sale amount of loans with lower interest rates the bank charges you 'points'. So giving you a lower interest rate means
that they make less money when they re-sell the loan; they make up for that difference by
charging Points.
But is it good to pay these points? That really depends on how long it will take you to 'break even'---that is, how long will it take you to recover the initial cost of the points in relation to your monthly savings. You also must consider the fact that morgage points are tax deductible. Above all, though, you should view morgage points as an investment. Consider that paying a Point on a $300,000 loan amount might you $3,000 but it might also save you about $75 per month on your payment as well as raise the amount you pay into principal by about $20 a month. If you stay in that loan for 3 years and 3 months then you will recover the cost of paying the point. After recovering this cost your savings total about $1,100 dollars per year thereafter. What this means is that you have a guaranteed 'Return' of about 37% on your 'investment'. Most people would consider that a fantastic annual return on an investment.
WHEN PAYING POINTS IS BAD: There are a few instances wherein paying points is not a good idea. To begin with, when there is a strong likelihood that you will be moving before 2 or 3 years pass. Although you may enjoy the benefits of lower payments during that period, you might not 'get back' the amount of money you paid in points. Another time is when paying points is the work of good old-fashioned greed on behalf of your Loan Officer. How do you know when a Loan Officer is trying to take a little too much of your money? You actually won't know for certain until you see the 'Final HUD', which shows exactly how much of your money will end up in the hands of the Morgage Brokerage you are working with. Review the Final HUD in detail and ask questions about the Morgage Brokerage's profit from the loan---are you comfortable with that amount? Voice your opinion and concerns, if any. Become an active, informed participant in your finances.
WHEN PAYING POINTS IS NECESSARY: Many morgages have what is referred to as a 'Hit', which is a fee payed for a riskier loan condition. For example, since a morgage on an Investment Property is considered a greater risk than a mortgage for a Primary Residence, you might have a 'hit' of 2 points on that morgage because it is an Investment Property. In this case, the Morgage Company doesn't make ANY money off of those points. It is due strictly because the loan is considered less profitable or riskier. Generally the Morgage Company will charge you a higher interest rate rather than charge you the points but, in some cases, it is not possible.
We hope this has helped you determine if you should pay morgage points or not; explained what points are; given you a basic definition; for more information search Google for 'Morgage Points Wiki' to view the Wikipedia entry.
But is it good to pay these points? That really depends on how long it will take you to 'break even'---that is, how long will it take you to recover the initial cost of the points in relation to your monthly savings. You also must consider the fact that morgage points are tax deductible. Above all, though, you should view morgage points as an investment. Consider that paying a Point on a $300,000 loan amount might you $3,000 but it might also save you about $75 per month on your payment as well as raise the amount you pay into principal by about $20 a month. If you stay in that loan for 3 years and 3 months then you will recover the cost of paying the point. After recovering this cost your savings total about $1,100 dollars per year thereafter. What this means is that you have a guaranteed 'Return' of about 37% on your 'investment'. Most people would consider that a fantastic annual return on an investment.
WHEN PAYING POINTS IS BAD: There are a few instances wherein paying points is not a good idea. To begin with, when there is a strong likelihood that you will be moving before 2 or 3 years pass. Although you may enjoy the benefits of lower payments during that period, you might not 'get back' the amount of money you paid in points. Another time is when paying points is the work of good old-fashioned greed on behalf of your Loan Officer. How do you know when a Loan Officer is trying to take a little too much of your money? You actually won't know for certain until you see the 'Final HUD', which shows exactly how much of your money will end up in the hands of the Morgage Brokerage you are working with. Review the Final HUD in detail and ask questions about the Morgage Brokerage's profit from the loan---are you comfortable with that amount? Voice your opinion and concerns, if any. Become an active, informed participant in your finances.
WHEN PAYING POINTS IS NECESSARY: Many morgages have what is referred to as a 'Hit', which is a fee payed for a riskier loan condition. For example, since a morgage on an Investment Property is considered a greater risk than a mortgage for a Primary Residence, you might have a 'hit' of 2 points on that morgage because it is an Investment Property. In this case, the Morgage Company doesn't make ANY money off of those points. It is due strictly because the loan is considered less profitable or riskier. Generally the Morgage Company will charge you a higher interest rate rather than charge you the points but, in some cases, it is not possible.
We hope this has helped you determine if you should pay morgage points or not; explained what points are; given you a basic definition; for more information search Google for 'Morgage Points Wiki' to view the Wikipedia entry.